As construction projects become larger and more complex, as well as require more specialized expertise and greater financial resources, there is an increasing use of formal tendering to solicit bids. "That’s especially true in the public sector, where there are many large, complex projects, such as schools, hospitals and laboratories, and a need for transparency in the procurement process," said Seema Lal, principal in Shapiro Hankinson and Knutson Law Corporation in Vancouver, B.C.
The process can be expensive for both sides of the process. "Because of the lawyers, consultants and bid evaluators who get involved, for owners the cost of tendering is high," she said. "And, for contractors, bidding on a tendered project is expensive, too, if the bids are technically complex."
Both owners/tendering authorities and contractor/bidders need to take the process seriously and be aware of the basic fundamentals of tendering and procurement law. From a legal point of view, at the heart of the matter is the fact that owners and bidders have different and competing interests. Bidders want the rules of the game clearly spelled out from the beginning of the process. They want to be sure they are playing on a level playing field and that they are treated fairly. They don’t want competing bids to receive favored treatment from owners. Bidders are also on the lookout for arbitrary or off-the-wall decisions by owners, or being taken advantage of for insignificant errors in their bids. Most owners, for their part, want to maximize their flexibility. They are reluctant to set in motion a process that will prevent them from reserving the right to make the final decision on the bids they receive. They also want plenty of leeway to react in the way they see fit to unexpected bid results or to unexpected bidders in whom the owners lack confidence. To maximize their freedom of action, owners will often include exclusion of liability clauses and privilege clauses in their tender documents.
"With an exclusion of liability clause, the project owner tries to limit his liability to unsuccessful bidders stemming from what the latter believe to be an error of omission or commission in the owner’s tender documents, in the owner’s evaluation or in the owner’s acceptance of tenders," said Lal.
Privilege clauses provide that the owner of a construction project is not obliged to take a bid even if it is the lowest price, if the owner believes price is not the sole determinant of what makes a winning bid. A privilege clause can also allow an owner to accept a bid that is not completely compliant with the tender documents. Lal said there is a wealth of case law in Canada dealing with tendering and procurement, in which the courts have tried to balance the competing interests of owners and bidders.
"The Ron Engineering Supreme Court of Canada decision in 1981 is still the most important case in the law of tendering and procurement," she said. R v Ron Engineering and Construction (Eastern) Ltd. centered on whether accepting a call for tenders for a construction job could constitute a binding contract. The decision introduced the concepts of Contract A and Contract B. The court found that a contract (Contract A) had arisen from the tenderer’s submission of a valid bid. Pursuant to Contract A, the Ontario owner had agreed to accept bids in accordance with the terms of the tender call. In exchange, bidders agreed that the bids were irrevocable and that they would enter into the construction contract (Contract B) if it was awarded by the owner. The tender documents further provided that where the bidder withdrew its bid or refused to enter the construction contract on award, it would forfeit its bid deposit. In the Ron Engineering case, the low bidder refused to enter into the construction contract upon award, citing a mistake in its bid. The owner, knowing of the mistake, refused to return the bidder’s deposit upon the refusal. The Supreme Court held that while the owner could not accept a mistake that was obvious on the face of the bid itself, the mistake was not so obvious in the case before it. Accordingly, the owner was entitled to enforce Contract A and retain the deposit.